It's raining dividends. Or, at least, thoughts of dividends. We're seeing:
- Dividends from companies that never have offered dividends before. On Sept. 14, Cisco Systems (CSCO, news, msgs) CEO John Chambers said the company is considering a 1% to 2% dividend for the fiscal year that ends in July 2011.
- Restored dividends from companies that had reduced or eliminated their dividends during the financial crisis and the Great Recession. At a Sept. 14 analysts meeting, JPMorgan Chase (JPM, news, msgs) CEO Jamie Dimon said his company would restore its dividend, probably in the first quarter of 2011, at a payout ratio of 30% to 40% of normalized earnings. JPMorgan Chase had cut its dividend to 20 cents a share from $1.52 a share during the financial crisis.
- Higher dividends from companies with histories of paying dividends. Yum Brands (YUM, news, msgs) and Paccar (PCAR, news, msgs) announced Sept. 14 that they would raise their dividends by 19% and 33%, respectively.
Why? Three reasons. And you can probably figure out all three for yourselves. No rocket science here.
A little goes a long way
First, companies cut dividends -- big time -- during the Great Recession. In 2008, the companies in the Standard & Poor's 500 Index ($INX) cut their dividends by $42.6 billion, a record for any year. But that record stood only until the numbers were in for 2009, when companies in the S&P 500 cut their dividends by $52.9 billion.Now that the future doesn't look quite so dark, many companies are restoring their dividends or raising them.
Second, companies are sitting on a tremendous amount of cash. Cisco Systems, for example, had $39.9 billion in cash at the end of July. A 2% dividend comes to roughly $2.4 billion on the company's 5.7 billion shares. That's about 6% of the company's current cash on hand and roughly equal to the company's pretax operating income last quarter.
But neither of these first two reasons would be quite so compelling from a CEO's point of view if not for the third reason:
With interest rates so low -- on Sept. 14, a two-year Treasury note yielded just 0.5% and a five-year note just 1.43% -- and investors so desperate for better returns, a relatively modest dividend payout gets a lot of attention and has a big effect on a stock's price. The day that Cisco announced that it was considering a 1% to 2% dividend, Cisco's shares, which had declined from $24.77 on Aug. 8 to $21.26 on Sept. 13, popped up 19 cents. That added $1.3 billion to the company's market value. An additional 23-cent gain in the stock price and the dividend will have paid for itself.
The rain of dividends and the reasons behind it, though, aren't unmixed blessings. Think of it this way: If a company can get a big pop from a very modest increase in its dividend, why should it offer investors a big yield? So, for example, Paccar's 33% dividend increase takes the quarterly payout to 12 cents from 9 cents per share. The yield on the stock went to 1% from 0.8%. Same with the increase in dividend at Yum Brands. With the increase in quarterly dividend to 25 cents from 21 cents, the yield will go to 2.2% from 1.9%.
In other words, in this market you've got a whole lot more stocks paying dividends, but most of those are paying paltry yields.
Another effect of the low-yield environment is that companies with stocks that are already on the march for reasons other than dividends don't feel compelled to raise dividends to keep up with their stock prices.
So the shares of an agricultural company such as Archer Daniels Midland (ADM, news, msgs), which paid a 2.4% yield in early July -- a yield almost a full percentage point above the yield on a five-year Treasury note -- now, after riding the agricultural commodity rally, pay just 1.9%. And that's less than half a percentage point above the five-year Treasury.
Continued: Quest for yield goes on
